Fed promises low rates until jobs picture improves

The central bank will buy more bonds to keep interest rates at ultra-low levels until unemployment drops below 6.5%. A goal is to try to offset any fiscal cliff effects. Stocks churn higher, then fade.

By Charley Blaine Dec 12, 2012 1:45PM
© Richard Drew/AP PhotoUpdated 4:27 p.m. ET

The Federal Reserve reaffirmed its commitment Wednesday to low interest rates for an indefinite period of time, a move that ensures low costs on mortgages, auto and business loans and government and corporate bonds.

The central bank agreed to keep the target on its federal funds rate -- the foundation on which all U.S. interest rates are built -- at 0% to 0.25%. And it agreed to expand dramatically its bond-buying programs to ensure that rates will, in fact, stay low.

More importantly, the Fed said that it will keep rates low as long as the national unemployment rate is above 6.5% and inflation is no more than a half-percentage point above its target range of 2% a year. This is the first time the Fed has tied its monetary policy to the unemployment rate.

Financial markets were pleasantly surprised by the move at first. What was a solid rally faded, however, into the close as markets picked up on Fed Chairman Ben Bernanke's worries about how the economy would be hurt if Congress and the White House can't agree on a plan to avoid the fiscal cliff. That is a combination of tax increases and spending cuts designed to reduce the deficit.

The Dow Jones industrials ($INDU) and Standard & Poor's 500 Index ($INX) were slightly ahead before the announcement and moved higher when the statement was released. The Dow rallied up as many as 81 points, but the blue chips lost all of the gain, finishing down 3 points to 13,245. 
The S&P 500 closed up 1 point 1,428. The Nasdaq Composite Index ($COMPX) was down 8 points to 3,014. The Nasdaq-100 Index ($NDX) was off 8 points to 2,675. Apple (AAPL) was a big reason for the Nasdaq-100's decline, falling $2.64 to $538.75.

Global markets had closed higher ahead of the decision.

Gold (-GC) moved up to $1,717.90 an ounce, a gain of $8.30. Crude oil (-CL) in New York settled at $86.77 a barrel, up 98 cents.

The central bank said the economy continued to expand "at a moderate pace." It noted, however, that job growth continues to be slow. The November unemployment rate was 7.7%, down from October's 7.9% but only because of a decline in the work force.

The Fed statement came at 12:30 p.m. ET. It was followed by a release of new Fed economic projections at 2 p.m, just before Bernanke's news conference began.

Payroll employment was up by a lukewarm 146,000 in November, just under the 2012 average of 150,000 jobs created every month. But jobs expanded at more than 230,000 a month in December 2011 and January and February 2012. 

The Fed's projections see unemployment hovering at current levels through the end of the year and falling slightly in 2013. The projections represent the views of the presidents of the 12 Federal Reserve banks and the 7 members of the Federal Reserve Board.

Growth in gross domestic product, the common measure of economic activity, were projected at 1.7% to 1.8% in 2012 and expand to 2.3% to 3% in 2013. Neither is an especially good growth rate.

One motivation in the Fed's thinking has been that it needs to try to offset the effects of the fiscal cliff set to kick in on Jan. 1 unless the Obama administration and Congress can agree to a deal. But Bernanke warned at his news conference that the Fed can not offset all the effects of the fiscal cliff provisions, which were part of a 2011 budget act.

Many economists believe that, if the government goes over the cliff, the result will be fewer jobs created as the economy sinks back into recession.

At his news conference Wednesday afternoon, Bernanke said the worries about the political problem are hurting the economy already. Businesses are deferring investment decisions and are holding back on hiring new workers. The Fed can mitigate some of the cliff's effects, Bernanke said, its overall set of tools won't be able offset all of the effects.

The odds of getting around the fiscal cliff appeared to be sinking on Wednesday. Democrats don't believe Republicans are serious about compromise and say the GOP will fight President Obama's proposal to boost tax rates on the most affluent Americans to the bitter end.

The president did agree, reports said, to consider lowering the top corporate income tax rate from 35%.

Republicans, meanwhile, complain that the Democrats aren't serious about cutting spending.

The noise Wednesday is that a deal won't be struck until after Christmas at the earliest.

The Fed's decision included an agreement to change what's been called Operation Twist. That's a program to sell short-term Treasury securities and buy longer-term issues. This will be replaced by a new program that the media have dubbed QE4 (short for Quantitative Easing, round 4) that buys in Treasury and mortgage-backed bonds at a rate of $45 billion a month that's not offset by sales of other securities. That goes with a program to buy mortgage-backed securities at a rate of $40 billion a month.

The decision to tie the Fed's stimulus to the unemployment rate was a new wrinkle to try to help the economy fully recover from the 2008-2009 financial crash. A 6.5% unemployment rate is not the Fed's goal, Bernanke said, but it's a signal that the Fed needs to start thinking about raising the cost of credit. The idea was formulated during the fall, Bernanke said. The Fed announced it on Wednesday because Bernanke was scheduled to hold a news conference.

The big question is if the bond-buying programs are having much effect on the domestic economy. Job creation is modest at best. GDP is probably growing at a rate of 2% or less.

Consumers increasingly are worried about the fiscal cliff and are giving hints they may curtail their own spending.

But auto sales have been showed solid gains all year, and many housing markets are beginning to expand thanks to low mortgage rates, declining inventories of foreclosed homes, and some confidence that job markets are stable.

There are two risks to the Fed's low-interest-rate policy. One is a new bout of inflation. The other is that companies and deal-makers will assume greater risks on selling bonds to finance new ventures.

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82Comments
Dec 12, 2012 2:50PM
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Gee only 4 years, 2 months until unemployment really starts to improve?   That's not too long to wait...


Dec 12, 2012 2:44PM
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They should put a picture of Bernanke next to the word "insanity" in the dictionary.
Dec 12, 2012 2:38PM
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It won't be long until a wheelbarrow full of cash will purchase one loaf of bread, but the weight will be 14 oz instead of 16 oz.  Double jeopardy.  Cash will be king soon as these artificially low interest rates are not sustainable and China's economy will not be able to continue to finance our ballooning debt.

 

Selling short-term Treasury securities and buying longer-term debt issues is what clobbered the savings & loan industry in the 70's and 80's.  I know  - most of you do not remember this as you only know mortgage rates of 6.00% or less.  I was in the financial industry for 36 years. In 1981 a certificate of deposit for 30 months was paying 16.20% and a 30 year 1 year adjustable rate mortgage was 17.50% with 2% annual and 5% lifetime interest rate caps.  We are heading back to this era.

 

Better wear your seatbelt and hang on for some brutal times.

Dec 12, 2012 2:24PM
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Raising Taxes has always SLOWED down an economy in the past.  It's fantastic that we have the economy growing so fast that we need to SLOW it down.

Printing, Taxing, Borrowing and spending will not lead to prosperity.

But it is good to know we need to apply the breaks on the economy....
Dec 12, 2012 2:22PM
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perhaps if jon boner and the republicans would stop being the bowels of the earth and do something for the people we would not have all this BS. Boner made a statement two years ago that his only purpose in life was to get rid of obama. He was wrong, the people have spoken. Now he needs to get off his sorry **** and do something for the american people. the republicans created all this bs with bushs tax cuts and two wars which were not funded. hell obama is a good guy and you tea baggers and pub baggers should get off all your dead asses and do something except whine....  
Dec 12, 2012 2:16PM
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85 billion a month, and no bounce in the market this time.  Maybe it was built in already or maybe we are seeing diminishing returns now that it is clear that there is no sustainable recovery going on.
Dec 12, 2012 2:09PM
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Are we talking about the real unemployment rate or the government's made up one?
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Taxing the rich as the President wants to do will pay for 2.19% of the Annual Debt.   Where will the other 98% monies come from to balance the budget?   It can only come from cutting spending or taxing the Middle class.   This President is the worse we have had since Jimmy..
Dec 12, 2012 2:00PM
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there goes your 12/12/12 end of the world. Take note of the prices in the grocery store and check back soon
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